Hey, today we are having lunch with the astute Morgan Housel of MF. I have been enjoying his writing for years now — he is my favorite Motley Fool writer.

Here is his very simple explanation for why the end-of-worlders have been wrong, and will continue to be wrong, for most of the future millenia (see chart above).

Housel noted what has occurred over the past 150 year or so. If you allowed the headlines to drive your investments, how would you respond to these events:

• 1.3 million Americans died while fighting nine major wars.

• Four U.S. presidents were assassinated.

• 675,000 Americans died in a single year from a flu pandemic.

• 30 separate natural disasters killed at least 400 Americans each

• 33 recessions lasted a cumulative 48 years.

• The stock market fell more than 10% from a recent high at least 97 times.

• Stocks lost a third of their value at least 12 times.

• Annual inflation exceeded 7% in 20 separate years.

• The words “economic pessimism” appeared in newspapers at least 29,000 times, according to Google.

And despite these horrific headline events, our standard of living increased 20X.

Investing is about objectively playing the odds — not about giving into emotions. This is a perfect example of how short term events can hurt your long term returns — if you allow yourself emotional reactions to them.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

Really? Did the standard of living increase for the 1.3 million Americans who died in wars, or the 675,000 who died in a singlevyear’s flu epidemic? Just whose standard of living is represented by that 20X increase? Is it only those who lived to be 150 years old?

This is the most common flaw among analysts of all stripes, and economists in particular — they insist on viewing a distribution of individuals as best represented by a single (usually contrived) statistical data point. For the past few decades, the bottom half (at least) of the economic spectrum of Americans has seen no economic improvements, with flat-to-declining real incomes, while costs of pretty much everything were steadily rising. The fraction of people participating in the economy has been relentlessly declining thus far this century, a lot of which is probably accounted for by demographics, but when you look at only the under-25 segment of this “recovery”, there is no discerible recovery at all.

The American economy is definitely continuing to grow, but in ways that most would not regard as healthy or sustainable, when taking in the body of individuals we call Americans. Hence, the prevailing backdrop of uncertainty and concern from most Americans.

But for the upper-most rungs of the economic ladder, most definitely, Happy Days are here again … just as they always have been and will be for the most privileged. And when you average in those with huge wealth and incomes seeing double-digit expansion year after year with those vast majority who are seeing little-to-no improvements, I suspect that things are still pretty bleak, when looking at “standard of living”. So we have to resort to a metric that measures not the economic situation of Americans, but the output of the Corporations, and divide that into the population to arrive at a per capita figure, blithely assuming a perfect distribution of the fruits of the economy.

But that’s not the case, distribution has always been imperfect, and always will be, but we have moved in wide swings across better and worse distributions in that 150 years, and are currently near the extremes of the “worse” end of those swings, with economic inequality mirroring that of the 1880s, another time when those at the top lived very well indeed.

If we examine how the swings reverse, it is typically via some prolonged economic calamity (the series of financial panics at the end of the 1800s culminating with the Crash of ’29 and the Great Depression) that destroys vast amounts of wealth, and levels the playing field.

Agreed. Most people are in debt their entire lives now, millions are on anti-depressants and tens of millions are on gvmt support (over 100 mil if including social programs?). Add to all that record per capita debt and I’d say standards of living today are an illusion.

WAG posts record profits, but because they are 6 lousy cents off some analyst’s crystal ball, the stock drops 7.5%. Luckily I am at home today, wired more money into my Roth and doubled my holdings of Walgreen’s. Thanks, all you herd animals.

Over the past century, the major GDP dips have been associated with major financial crises, either private or public sector. All the other stuff doesn’t seem to impact GDP much.

North America is blessed with widespread natural resources and also has a culture of inclusion so immigrants comein regularly and provide fresh energy that helps to rejuvenate the system Very few other cultures have this combination, so we can rejuvenate contnent wide on a regular basis – I suspect we are early in a rejuvenation process now.

If bullish buy despair at discount; if bearish sell euphoria at premium. Your directional bias must conform to at least one economic cycle. The idea of daytrading or jumping in/out on every headline is the only reason to underperform & hurt emotions. Stocks market is almost the easiest place to hit jackpot if only one can be factual, patient with acumen.

catman, WAG may or may not be a good investment, but my point is that you can’t tell that by a six cent blip in an estimate. This “making the number” thing is my pet peeve. In investigative science or developmental engineering, when we do an experiment or make an observation and the results are not what we expected, we don’t say,”Bad Nature! You underperformed!” Instead we look back to see why WE made the wrong prediction. Reality is never wrong. That’s why I referred to “crystal ball”. Wall Street analysts assume that they are right and if their prediction fails to come off, Reality is wrong, they never make a bad prediction. Then herds of sheep thunder off in a panic.

Wag closed 2% above when I bought it shortly before noon New York Time. Going against the herd is usually a good thing to do. Unless there is a Lion chasing the herd.

Thanks for your observation. It is much much better data than “Walgreen’s failed to meet it’s number by six cents!” It could well be that the record profit was achieved by neglecting infrastructure..

Characterizing bears or pessimists as “end-of-the-worlders” is a nice strawman. I read Housel’s argument and it is an incomplete analysis, at best. What tailwinds did we have for much of the past 150 years in terms of improving technology, broader access to education/information, and (relatively) good governance?

And what was the effect of a planet so large (until recently) that we couldn’t deplete its resources or foul the environment beyond its ability to regenerate? We have a financial/business system built on unending growth and a planet with a finite capacity to sustain life.

Some might say Morgan Housel is playing the odds. Others might say he’s focused on the rear-view mirror. Evolution is not kind to those who don’t pay attention to their surroundings.

Barry, sorry to be unbearably pedantic, but Western Roman Empire existed for just over 500 years. If you count Byzantine Empire, then it’s almost 1500 years… Now if we look at the duration of Roman Republic and Western Roman Empire then we get close to 1000 years :)

If one were able to zoom in on that chart until you could see real-world time scales, and if it were something better than per capita GDP (which basically is showing us the progress in manufacturing efficiency made by the industrial (and post-industrial) revolution(s)), then one might be able to point to it as a well-lit path to a brighter and happier future.

And a “brighter and happier” future is certainly out there for a lotta emerging nations (where there is more interest in a strong and growing middle class), and a lotta corporate chieftains, pols, and billionaires … but not necessarily for the American people, or for the small investors. That case still needs to be made.

I think that the successful small investors will be the ones performing their due diligence in getting on top of foreign markets and opportunities (which is a LOT harder than researching US stocks — the US remains the unquestioned champion in corporate financial transparency, for all our (many) flaws). And managing to ride the larger waves of beta that are in those smaller markets.

The world is definitely becoming more prosperous, and even the developed nations, although nearly all the prosperity in the developed world is going to the kings and nobility, with the serfs merely watching. But in the rest of the world, it is truly a “rising tide lifts all boats” scenario. Back here (and even more-so in the EU), the little peoples’ boats are firmly anchored to the ocean floor.

Soon enough the emerging nations will be automating to achieve a lot of their prosperity — and I have absolutely nothing to say against automation, as it produces more for less cost — and then we will see how strong their commitment is to strengthening their middle classes. The world needs some better ideas than old-world socialism (although it seems to work well enough in northern European societies), and certainly better ideas than capitalism’s pyramid of labor as a means of distributing the profits from society. And some real debate on these matters, of a higher quality than we are likely to get from our best-government-money-can-buy politicians.

But historically, for the magnitude of change that this requires, these changes are typically not brought about smoothly, or peacefully. Look to the late-18th century, as representative governments displaced monarchies throughout the developed world of those days. It was generally a pretty turbulent time, oscillating between enthusiasm and outright terror. And there was a substantial body of enlightened people who debated and argued for years as to how things ought to proceed, back in those times. I can think of no one of a comparable intellectual stature today, at least no one that is currently in government.

The grand arc of Industrial Capitalism was only possible by the discovery and utilization of millions of years of stored sunlight beginning almost exactly when the Real GDP chart above began in 1850. Now we are seeing the costs to extract fossil fuels rise steeply and we see the consequences of burning such fuels in a ever hotter planet with devastating floods, droughts and climate shifts. In the near future, the expenditure of greater amounts of capital will produce smaller amounts of energy; economic contraction is almost certain. This will take decades to play out but in the near future your world is about to get smaller and less complex as it must deal with reduced energy and capital availability.
Cheer up, real GDP per Capita has almost nothing to do with human happiness.

Agree with most of the comments above, but just to add one thing about this analysis that I find funny…

Housel is essentially suggesting that we should develop a broader and longer term perspective, ignoring the small-scale “noise.” Putting aside that people live their lives on the small scale, this is funny because one could use his own argument to justify future pessimism. He conveniently started his chart at the time humans began tapping into the most dense forms of energy our planet has to offer. Broaden the timescale to an even longer term…say 1500, as in the chart shown here:

and his position appears much less impenetrable. I say we’d better find a suitable, growable replacement for the fossil fuel anomaly, or I’m looking for a reversion to the mean beginning in my lifetime.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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